The Impact of Top Executives Overconfidence on Financial Distress

Overconfident managers might invest free cash flows in projects that have negative net present value. Then problem in gaining needed free cash flows can make them incapable of fulfilling the payment obligations on debt and the firm may encounter financial distress. This study investigates the effect of top executives’ overconfidence on financial distress. The target sample includes 103 firms listed in (TSE) during 2007 to 2011. In order to investigate the research hypotheses logistic regression model and independent samples t-test were applied. The evidence obtained in this study showed that companies managed by overconfident managers significantly indicate higher levels of financial distress. Results also showed that managerial overconfidence has a significant impact on financial distress.